Sunday, January 15, 2012

Think(?)tank advocates shorter working hours as cure for unemployment.

OMG & WTF: The New Economics Foundation (NEF) is advocating shortening the working week to about 20 hours as a way of reducing unemployment! Not that one again!!!

To be fair, the NEF do advocate a number of other advantages to a shorter working week, such as reduced stress and reduced consumption of the world’s scarce resources. I have no quarrel with that. Indeed Jesus, 2000 years ago, and Buddha six hundred years before that were advocating people should be less concerned with worldly wealth. Perhaps they were right.

The NEF’s (hopefully temporary) departure from sanity would not matter if the rest of the world was clued up as to the basic flaw in the “shorter working week as a cure for unemployment” myth. Unfortunately it’s not.

Even Robert Skidelsky, an economist I normally greatly respect, seems to have fallen for this nonsense.

The fallacious lump of labour fallacy.

The most popular rebuttal of the shorter working week argument is to cite the so called “lump of labour” fallacy. Personally I find the lump of labour fallacy very muddled and unconvincing. Here is just one reason.

The lump of labour argument normally accuses advocates of the shorter working week of assuming (to quote Wiki) that “the number of hours of labour per day that are demanded by the market is constant”.

Well it’s blindingly obvious that advocates of the shorter working week are NOT MAKING that assumption. To illustrate, suppose the entire workforce of a country cuts working hours from 40 to 20 hours a week, and let’s say unemployment is at the maximum it has reached in the US in the last three years: about 10%.

Let’s also make the over-simple assumption that the aim is to reduce unemployment to zero.

Achieving this end in the above hypothetical scenario quite clearly DOES NOT require there to be a CONSTANT demand for labour hours. Indeed, if there were such a constant demand, then demand would be far too high!!! Here’s the maths.

The original number of hours worked involved 0.9 of the workforce working 40 hours. 0.9 x 40 = 36. The new number of hours will be 100% of the workforce working 20 hours. 1.0 x 20 = 20. Thus the new total demand for labour hours needs to be 20/36 = 0.55 of the original total number. QED.

Conclusion: the lump of labour fallacy is itself fallacious!

The real flaw.

Now for the real flaw in the shorter working week argument.

The REAL flaw in in the shorter working hours is not actually a hundred miles from the above Wiki one, and it is thus. The shorter working week argument assumes aggregate labour supply can be reduced relative to aggregate demand for labour with no inflationary consequences. Now if that’s the case, then aggregate demand for labour can presumably be increased relative to aggregate labour supply with no inflationary consequences! In short, if the objective is to reduce unemployment, why not just bump up demand?

Note that what I called the “real flaw” in the shorter working week argument is actually the same as the Wiki argument, but put in more general terms. I.e. the Wiki argument is a PARTICULAR CASE of my “real flaw”.

Anyway, if you are convinced, then read no further. But for those who want a more detailed explanation, read on.

More details.

As unemployment falls it becomes increasingly difficult for employers to find the types of labour they want. And when it falls far enough, too many employers resort to poaching staff from other firms rather than take labour from the ranks of the unemployed.

This poaching may be conscious or it may be entirely unconscious. E.g. the more difficult it is to find specific types of labour from the dole queue, the more an employer is likely to spend on advertising for such labour, which inevitably tends to draw a labour from other firms, all of which tends result in the price of labour rising too fast in nominal terms, and that equals inflation.

That lack of the right type of labour on each local labour market is a simple statistical phenomenon: that is, the smaller the number of unemployed, the less the likelihood of any given employer being able to find the labour they want from the dole queue.

Now if one cuts working hours, that has NO EFFECT WHATEVER on the likelihood of employers being able to find the labour they want from the dole queue at any given level of unemployment. Ergo NAIRU or the “natural level of unemployment” or the “inflation barrier level of unemployment” to paraphrase Bill Mitchell remains exactly where it was.

I’ll put that differently just to clarify. If at unemployment level X, the last plumber disappears from the dole queue in a particular town when everyone is doing 40 hours a week, then the last plumber will also disappear from the dole queue at exactly the same level of unemployment when everyone does 30 or 20 hours a week. (That assumes of course that the PATTERN of demand for labour on each local labour market remains unaltered by the working hours reduction: i.e. I’m assuming that the demand for plumbers RELATIVE TO the demand for other skills remains unaltered, which is not a wildly unrealistic assumption.)

Conclusion: shortening the working week does absolutely nothing to improve the unemployment / inflation trade-off. Therefor unemployment will be unaffected.

Immigration raises labour supply – shock horror.

A curious feature of those who advocate a shorter working week is that my hunch is they are the same sort of people who claim that immigration does not raise unemployment: (left of centre / liberal / politically correct, etc).So they’re saying that in the case of immigration, increasing aggregate labour supply DOES NOT raise unemployment, but were we to increase labour supply by increasing the working week from say 20 hours to 40 hours, that WOULD INCREASE unemployment. A slight self-contradiction there, I think.

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Afterthought (same day): Here’s Tim Worstall’s take on the NEF. Tim Worstall’s blog is worth following. His style is very sarcastic, abusive and witty. He uses three and four letter words with regularity. But he does understand economics, so I keep an eye on his blog with a view to knicking his ideas and presenting them as my own :-). Imitation is the sincerest form of flattery.

Afterthought (22nd Jan). I said above that cutting working hours has no effect on the “likelihood of employers being able to find the labour they want from the dole queue”. On second thoughts, reducing working hours involves those who work for employment agencies (private and public) ALSO reducing their working hours. Such agencies will thus devote less time per week to each of their customers. Thus the above mentioned “likelihood” will DETERIORATE. Hence reduced working hours will actually RAISE unemployment all else equal.